The woman who decides the fate of millions of mortgage holders has declared a rate cut won’t be happening anytime soon – despite what other countries have done this year.
Reserve Bank Governor Michele Bullock told a parliamentary hearing on Friday that Australia would not be copying the approach of other central banks that have cut rates this year, with New Zealand this week offering some relief.
‘Financial markets are still pricing in a rate cut here in Australia by the end of the year,’ she told the House of Representatives economics committee in Canberra.
‘The board’s message, though, was that it’s premature to be thinking about rate cuts – inflation is still too high and in underlying terms it isn’t expected to be back in the top of the band until the end of next year.
‘Based on what the board knows at present, it doesn’t expect it will be in a position to cut rates in the near term.
‘I do understand this is not what households want to hear – those with mortgages are feeling the squeeze on their cash flows from the increase in interest rates over the past couple of years.’
The Reserve Bank of New Zealand this week cut interest rates for the first time since 2020, following the approach of its counterparts in Canada, the European Union and the United Kingdom.
But Ms Bullock also argued that didn’t mean other central banks would start cutting rates aggressively.
Reserve Bank Governor Michele Bullock told a parliamentary hearing on Friday that Australia would not be copying the approach of other central banks that have cut rates this year, with New Zealand this week offering some relief
‘Other central banks are remaining cautious about the future path of interest rates,’ she said.
‘Some have reduced their policy rates a little but they have been emphasising that the job is still not done and policy remains restrictive.’
While Australia’s cash rate of 4.35 per cent is at the highest level in more than 12 years, it’s lower than New Zealand’s 5.25 per cent, the UK’s 5 per cent and Canada’s 4.5 per cent.
These central banks, along with the European Union, have this year cut interest rates.
‘Likewise here in Australia – we didn’t increase interest rates as much as some other central banks and we have received some criticism for that,’ she said.
Former RBA board member Warwick McKibbin, who is now an Australian National University professor, has suggested the Reserve Bank would have to raise rates three more times to 5.1 per cent – a level last seen in 2008 before the Global Financial Crisis.
‘Indeed, some commentators continue to call for further tightening in monetary policy,’ Ms Bullock said.
‘We’ve been trying to balance bringing inflation back down over a reasonable time frame without inflicting unnecessary damage on the labour market.’
While Australia’s cash rate of 4.35 per cent is at the highest level in more than 12 years, it’s lower than New Zealand’s 5.25 per cent, the UK’s 5 per cent and Canada’s 4.5 per cent
The Reserve Bank this month left interest rates on hold but it released new forecasts predicting underlying inflation – taking out volatile price items – would not hit the top of the RBA’s 2 to 3 per cent target until the end of 2025.
Unemployment last month hit a two-year high of 4.2 per cent, as the most aggressive interest rates increases since the late 1980s causes a spike in insolvencies to record-high levels.
Ms Bullock said the Reserve Bank would aim to improve its forecasting, after her predecessor Philip Lowe in 2021 declared rates would stay on hold at a record-low of 0.1 per cent until 2024 ‘at the earliest’.
Instead, borrowers copped 13 rate rises in 2022 and 2023 that led to a 68 per cent surge in monthly variable mortgage repayments.
‘We need to be willing to learn from our errors,’ Ms Bullock said.
Headline inflation, also known as the consumer price index, edged up to 3.8 per cent in the year to June.
Ms Bullock said construction costs were included in the CPI which also meant Australia had higher goods inflation.
‘There are shortages of trades people so their costs are going up and there are costs, particularly of energy-intensive products like concrete – they’ve contributed also to the costs of building homes,’ she said.
‘All of those things have meant that construction costs have continued to rise more in Australia, they’re in our CPI and that’s meant that our goods price inflation has been a little bit higher than overseas.’
Ms Bullock said construction costs were included in the CPI which also meant Australia had higher goods inflation
